Barron’s has beaten up on the group that we’ve called “closet indexers.” They charge too much and deliver too little in an era when investors can get identical (often enough, better) performance from a cheap index fund.

Examples of funds whose portfolios diverge widely from commonly watched stock indexes include Goodhaven (GOODX), with its outsized bets on Hewlett-Packard (HPQ) and Spectrum Brands (SPB), or Oakmark Select (OAKLX) and CGM Focus (CGMFX). (Of course, you also get the chance of big losses. No risk, no reward.)

If you buy an index hugger, you’re paying 1% of assets per year for a fund that hews just below the S&P 500 (SPY), when you could simply pay 0.05% for a passive index fund. Over time, the fees add up.

But the active ETF — a fund that trades on the exchange continuously and features the picks of a manager instead of an index — could be the thing that gives index huggers a shot at modestly better performance than before, writes Kephart:

Fees are one of the big reasons that just 25% of all actively managed domestic equity funds beat their respective benchmark over the three-year period ended Dec. 31, according to Standard and Poor’s.

That is where actively managed ETFs come in, Mr. Burns said.

Fees for actively managed ETFs seem to have settled in between the retail and institutional mutual fund share classes, making the hurdle for beating an index much lower.

Investing in actively managed ETFs also sidesteps any 12(b)-1 fees, sales load charges and fees to get on different mutual fund platforms, all of which will boost the individual shareholder’s performance investing in the fund.

“They need every basis point they can get,” Mr. Burns said.

The caveat here is that investors who use their ETFs poorly — say, those who sell when the market is bearish and buy when it’s bullish — risk undoing whatever advantage is gained by the use of a different structure.

That’s because, unlike mutual funds, where trading costs are effectively borne by all investors as a hidden drag on performance, each ETF investor bears his or her own trading costs.

About Focus on Funds

As exchange-traded funds and other investing vehicles have ballooned in number, the task of figuring out what works well and what doesn’t has only gotten harder. Barrons.com’s Focus on Funds looks under the hood of ETFs, mutual funds and hedge funds for overlooked values, actionable ideas and the latest pitfalls for fund investors.